Diebold Nixdorf, Inc. — Form 10-Q Summary
Business context and reporting period
Diebold Nixdorf provides connected commerce solutions for financial institutions and retailers, including services, software, ATMs, point-of-sale systems, kiosks and related technologies. This unaudited Form 10-Q covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017. The company reported approximately 23,000 employees and operated through Services, Software and Systems segments during the quarter.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $1,064.2 million | $1,102.8 million |
| Gross profit / margin | $240.9 million / 22.6% | $242.5 million / 22.0% |
| Operating profit (loss) / margin | $(21.0) million / (2.0)% | $(48.6) million / (4.4)% |
| Net income (loss) | $(63.3) million | $(52.2) million |
| Net loss attributable to Diebold Nixdorf | $(70.9) million | $(58.8) million |
| Diluted loss per share | $(0.94) | $(0.78) |
| Net cash used in operating activities | $(142.3) million | $(66.3) million |
- Services revenue was $592.2 million, up 3.3%; Software revenue was $119.5 million, up 8.2%; and Systems revenue was $352.5 million, down 15.9%.
- Services and software gross margin declined to 24.2% from 26.1%, while Systems gross margin improved to 19.4% from 15.4%. Total gross margin increased by 60 basis points.
- Operating expenses declined 10.0% to $261.9 million, reflecting lower selling and administrative, restructuring and non-routine costs, and a $7.7 million net gain on asset sales.
- Interest expense declined to $26.0 million from $30.8 million, but income tax expense was $19.4 million versus a $22.6 million benefit in the prior year. The 2018 effective tax rate was negative 44.2%, primarily due to Tax Act and GILTI effects.
- Cash and cash equivalents were $362.1 million at March 31, 2018, down from $535.2 million at December 31, 2017. Total cash availability, including short-term investments and available credit facilities, was $1.10 billion.
- Working capital used significant cash, including a $92.5 million inventory increase and a $17.9 million increase in trade receivables. Capital expenditures were $20.2 million.
- Debt included $76.6 million of current notes payable and $1.7125 billion of long-term debt, net of deferred financing fees. The company repaid $75.0 million under its revolving facility during the quarter and had $520.0 million of revolving capacity available at March 31, 2018.
- The company was in compliance with its debt covenants at quarter-end. The disclosed maximum leverage ratio was 4.25 to 1.00 and the minimum adjusted EBITDA-to-net-interest coverage ratio was 3.00 to 1.00.
Material changes versus the prior comparable period
- Reported revenue decreased 3.5%; on a constant-currency basis, revenue declined 10.7%. Favorable currency translation, principally from the euro, increased reported revenue by $88.6 million.
- Systems revenue was adversely affected by lower volumes, supply-chain delays in North America and weaker activity in several international markets. Management expected the supply-chain issues to be resolved within 2018.
- Banking revenue decreased 6.2%, while Retail revenue increased 4.3%; on a constant-currency basis, both solutions declined.
- Operating loss improved by $27.6 million, primarily because of lower restructuring and non-routine expenses and the gain on asset sales.
- Net loss worsened by $11.1 million because the improvement in operating results was more than offset by the prior-year tax benefit versus current-year tax expense.
- Net cash used in operations increased by $76.0 million, driven mainly by inventory investment, timing of customer prepayments and other working-capital requirements.
- Restructuring charges declined to $3.9 million from $12.9 million. The DN2020 program had generated approximately $93.6 million of cumulative restructuring costs through March 31, 2018, with approximately $50 million of additional costs anticipated through completion.
- The company adopted ASC Topic 606 using the modified retrospective method, resulting in a $4.6 million cumulative increase to retained earnings at January 1, 2018. It also early adopted certain hedging and comprehensive-income standards.
Guidance, outlook, commentary and risks
- Management’s integration and transformation program targets approximately $240 million of cost reductions by 2020 through procurement, platform harmonization, service utilization, facility rationalization and corporate-process efficiencies.
- Management was realigning the operating model around Banking and Retail and expected to report those as the operating segments beginning in the second quarter of 2018, with comparative periods reclassified.
- The company stated that capital resources were expected to be sufficient for planned working capital, research and development, capital investment, pension contributions, dividends and potential share repurchases for at least the next 12 months.
- In May 2018, after the reporting period, the company announced that future dividend funds would be redirected toward debt reduction and other capital needs. The company had paid a $0.10-per-share quarterly dividend during Q1.
- Key risks include execution of the Diebold Nixdorf AG integration and DN2020 program, leverage and covenant compliance, supply-chain disruptions, foreign-exchange volatility, Tax Act effects, customer capital spending, cybersecurity and operational failures, competition, pension funding and the ability to maintain dividends.
- Material contingencies include Brazil indirect-tax proceedings, for which $4.9 million was accrued, and aggregate estimated exposure of up to $144.6 million for material indirect-tax matters. The company also disclosed $182.0 million of maximum future obligations under guarantees and standby letters of credit, with no associated liability recorded.
- Redeemable noncontrolling interests were $509.6 million, principally associated with minority shareholders of Diebold Nixdorf AG. The timing and amount of potential future cash payments under the related agreement remain uncertain.
Most important facts for investors to verify
- Whether Systems demand and supply-chain delays recover as anticipated and whether revenue growth becomes less dependent on favorable currency translation.
- Progress toward the $240 million 2020 cost-reduction target, including the remaining approximately $50 million of expected restructuring costs.
- Operating cash-flow conversion, inventory normalization and the company’s ability to reduce debt while funding operations and investments.
- Compliance with the amended leverage covenant as the permitted ratio tightens after 2018.
- The effect of the May 2018 dividend reallocation on shareholder returns and debt reduction.
- Potential cash requirements from the Diebold Nixdorf AG minority-interest arrangements and indirect-tax contingencies.
- The sustainability of reported margins after excluding currency effects, purchase-accounting adjustments, restructuring charges and asset-sale gains.